Financial review

In conjunction with the chairman’s statement and the chief executive’s review, this report provides further information on the key aspects of the financial performance and the financial position of the Group.

Profit before tax (£m)*

+24%

Earnings per share (p)*

+26%

Dividend (p)

+10%

* Before exceptional items and amortisation of intangible assets

** Excluding Homes 2010 one-off land transaction profit of £7.1m

The Group’s annual consolidated financial statements have been prepared in accordance with International Financial Reporting Standards as adopted by the EU. Except as stated below or in the disclosures in note 1 to the consolidated financial statements, there have been no significant changes to the accounting policies adopted by the Group during the year to 30 June 2011.

During the year, in our Structured Finance business, we continued with our strategy to regularly dispose of our mature PFI investments from our portfolio and recycle the capital. The profit on disposal has previously been disclosed as an exceptional item; however the directors believe this presentation is no longer appropriate, as they are now expected to be recurring items, and have included the profit on disposal in the operating profit for the year to 30 June 2011. The 2010 comparative figures have been restated accordingly.

Revenue has increased by 4% (£80m), predominantly through organic growth; however, the acquisition of Beco Limited (Beco) in November 2010 and the early sale of two properties from the property portfolio acquired from Lloyds, in April 2011, have contributed a combined £18m of that amount. Underlying growth, excluding the 2010 land transaction in the Homes division, is spread across all four divisions, which reflects the strength and depth of the Group’s activities.

Operating profit including joint ventures, before the amortisation of intangible assets, was 23% ahead of last year at £71.1m with operating margins of 2.7% in our Construction division, up on 2.6% in 2010, and good, consistent margins in our Services division of 4.5% (2010: 4.5%). The Homes and Property divisions also saw an increase in underlying operating margins. Detailed information on the operating performance of each of the divisions is provided within the Chief Executive’s review.

The Group’s net finance cost, analysed below, includes interest receivable arising from average net cash balances of £129m for the year (2010: £95m). The increase in interest payable includes the fees following the increase and renegotiation of our banking facilities.

Profit before tax, amortisation of intangible assets and exceptional items increased by 24% to £68.9m (2010: £55.5m**). This includes a joint venture tax charge of £0.3m (2010: credit of £0.1m) and is stated before minority interests of £0.5m (2010: £0.8m). The minority interest relates to the share of profits of our Maintenance business which are attributable to contracts it has with local authorities.

The Group’s effective tax rate, including joint venture tax on joint venture profits, has reduced from 21% last year to 19% mainly as a consequence of the increase in the profit on disposal of the PFI investments and the reduction in the standard corporation tax rate.

Earnings per share before amortisation of intangible assets and exceptional items was 26% ahead of last year at 148.4p (2010: 117.7p**), benefiting from the reduction in the effective tax rate.

Exceptional items amounted to a net credit before tax of £7.0m, as follows:

The £25.7m credit in the income statement and corresponding improvement in the funding position of the Kier Group Pension Scheme (the Pension Scheme) has arisen from changes announced in the 2010 Budget which apply to private sector pension schemes. These changes will result in future pensions increasing at the rate of the Consumer Price Index (CPI) rather than at the Retail Price index (RPI) and, therefore, reduce pension scheme liabilities.

On 22 September 2009, Kier, along with 102 other construction companies, was fined in respect of the OFT investigation into cover-pricing in the construction industry. We appealed against the quantum (£17.9m) of the fine and established an exceptional provision of £18.0m in 2010. In May 2011 the Competition Appeals Tribunal concluded the appeal process and the quantum of the fine was reduced to £1.7m. The resulting £15.6m exceptional credit reflects the reduction in the fine and £0.7m of external costs incurred in relation to the appeal process.

As a result of the values received from a number of land sales during the second half of the year and following a review of our land bank, we have written down the value of our land and work in progress by £33.5m. It now better reflects the current market conditions and our strategy to downsize our land bank and maintain a 500 to 600-unit private housing business.

We have incurred external costs relating to the acquisitions of Beco and the property portfolio from Lloyds which totalled £0.8m.

The cash performance has remained very strong, with average Group month-end net cash of £129m (2010: £95m). Following the initial payment, in April 2011, of £35m for the property portfolio from Lloyds, the subsequent early sale of two assets recouped £26m of that outlay which supported a net cash position at 30 June 2011, after deducting £30m relating to loan notes, of £165m (2010: £175m).

Overall the Group has invested approximately £50m during the year in its own growth, including land payments, mining equipment, further investment in Pure Recycling, the acquisition of Beco and the property portfolio from Lloyds.

The Group’s cash balances at 30 June 2011 include £73m (2009: £52m) which is held in joint contracting agreements, overseas bank accounts and other cash arrangements and is therefore not readily available to the Group. The liquid cash position is also affected by seasonal, monthly and contract-specific cycles.

Average month-end net cash (£m)

+36%

We continue to maintain our progressive dividend policy and, taking into account the performance of the Group and its strong cash position, the Board has recommended a final dividend of 44p, making the full-year dividend 64p, an increase of 10% on the total paid in respect of 2010 (58p) reflecting the confidence in the business going forward. This is 2.3 times covered by underlying earnings per share.

The Group has a number of committed bilateral facilities, which amount to £90m, an uncommitted £10m overdraft facility and long-term debt of £30m, all managed by the centralised treasury function.

The bilateral facilities were renewed during the year and extend to February 2014. A small number of relationship banks provide these facilities which support the Group and its future growth plans. The long-term debt of £30m represents a 10-year UK and US private placement and is due to be repaid in February 2013.

The Group’s financial instruments comprise cash and liquid investments. The Group, largely through its PFI and Property joint ventures, enters into derivatives transactions (principally, interest rate swaps) to manage interest rate risks arising from the Group’s operations and its sources of finance. We do not enter into speculative transactions.

There are minor foreign currency risks arising from operations. The Group has a limited number of overseas operations in different currencies. Currency exposure to overseas assets is hedged through inter-company balances and borrowings, so that assets denominated in foreign currencies are matched, as far as possible, by liabilities. Where there may be further exposure to foreign currency fluctuations, forward exchange contracts are entered into to buy and sell foreign currency.

Total equity at 30 June 2011 is £164m (2010: £104m).

The balance sheet at 30 June 2011 includes intangible assets of £27m (2010: £28m) of which £11m relates to building maintenance contracts.

During the year, we made two acquisitions as follows:

• In November 2010, we acquired Beco for a total consideration of £2.4m. £1.3m has been paid in the year to 30 June 2011 with the remainder contingent upon the completion of certain events, together with the results of the business through to 2013. The net present value of the deferred consideration is £1.0m.
• In April 2011, we acquired Lloyds Banking Group’s 50% interest in our jointly owned portfolio of property assets. The aggregate consideration was £91m, of which £35m was paid in cash on completion, £30m will be paid in cash in October 2012 and £26m will be paid in cash in October 2013. The net present value of the deferred consideration is £52m.

An analysis of inventories is given below:

The review of our land bank, which resulted in a write-down of the value of the land and work in progress by £33.5m, accounts for much of the decrease in the residential land balance above, with the remainder due to unit and land sales.

The increase in residential work in progress highlights an increase in investment on apartment schemes, which have a different cash profile to a typical housing scheme.

Property land and work in progress has increased as it now includes the property assets acquired as part of the property portfolio transaction with Lloyds.

The Group participates in two principal schemes: the Kier Group Pension Scheme, which includes a defined benefit section, and a defined benefit scheme on behalf of its employees in Kier Sheffield LLP. The financial statements reflect the pension scheme deficits calculated in accordance with IAS 19.

Steel frame, Buckfast Winery site
The £3m Buckfast Abbey winery project in Devon will facilitate the continued success of this important local brand and support the Abbey’s charitable work in the area. The project, which must be built within the grounds of the Abbey to protect the Buckfast name, will comprise the construction of a new 1,300sq m winery together with drainage, external works and a new access road.

Maidstone Prison
This project at Maidstone Prison comprised construction of a new kitchen facility using precast floors and walls with a structural steel roof and composite panel roof structure. The new kitchen is based on NOMS standard design adjusted to fit within the layout and topography of the site. The building was designed to sit on the area of the existing kitchen to make use of existing foundations. Rainwater recycling was incorporated within the project to assist in meeting a BREEAM Excellent target.

The triennial valuation of the Kier Group Pension Scheme, dated 1 April 2010, was completed during the year and showed a funding position of 88%. Following discussion with the trustees, a funding plan has been agreed that maintains the current annual £8m additional deficit funding. This will also be supplemented with transfers of the Group’s PFI assets as they become available and are suitable for the Scheme. The Group is committed to continuing to support the funding position of the Scheme.

At 30 June 2011, the net deficit under the Kier Group Pension Scheme was £23m (2010: £57m). The net deficit position is after taking into account the exceptional credit of £25.7m arising from changes announced in the 2010 Budget which apply to private sector pension schemes. These changes will result in future pensions increasing at the rate of CPI rather than RPI and, therefore, reduce the Scheme liabilities.

The market value of the Pension Scheme’s assets was £680m (2010: £611m) and the net present value of the liabilities was £711m (2010: £690m). The increase in the assets during the year is because equity and other return-seeking assets increased more than previously assumed, while bond markets remained relatively flat.

The increase in the liabilities during the year is primarily the result of the increase in RPI to 3.6% (2010: 3.2%), the hardening of mortality assumptions offset by the increase in discount rate to 5.5% (2010: 5.3%) and the change in inflation assumptions (RPI to CPI) described earlier.

At 30 June 2011, the scheme relating to Kier Sheffield LLP showed a net surplus position of £1m (2010: net deficit £6m).

Note 8 of the consolidated financial statements includes a sensitivity analysis that highlights the impact of changes to the key assumptions to the Kier Group Pension Scheme and the Kier Sheffield LLP pension scheme.

Net pension charges of £4.8m (before the exceptional credit of £25.7m) (2010: £11.9m) have been made to the income statement in accordance with IAS 19. The lower charge reflects the higher return on scheme assets.

The directors’ report states that appropriate enquiries have been made regarding the level of resources to continue in operational existence for the foreseeable future and the chief executive’s review highlights the activities of the Group with factors likely to affect the Group’s future development, performance and financial position.

The Group has considerable financial resources, committed banking facilities, long-term contracts and a strong order book, and for this reason the directors have continued to adopt the going concern basis in preparing the Group’s financial statements.

Haydn Mursell
Finance Director